From the National Post:

Various charges and smears were levelled at Sears Holdings, but the core case was this: Sears Holdings, a Chicago-based investment firm, signed support agreements with Royal Bank and Bank of Nova Scotia. Under the agreements, the banks would tender their Sears Canada shares providing the $900-million takeover did not close until later this year. The OSC claimed these agreements conveyed illegal "collateral benefits" on the banks. Especially noteworthy was an alleged $122-million tax benefit.

The banks and the companies argued, convincingly to me, that the banks got no benefits that were not available to any other shareholder. The banks get no more money than they would have gotten from any other offer; indeed, they will still get the tax benefit if they sell to somebody else later. No other shareholder was deprived of one cent in the deal.

What did the court make of these arguments? It didn't waste its time on the facts. Instead, it fell back on a long-established principle of Canadian law in which the courts bow out of a case on the grounds that they should not interfere in the work of a specialized regulator such as the OSC.

This principle of non-interference is called "curial deference" and is an argument used by the OSC in trying to get Justice Colin Campbell to stop looking over the OSC's shoulder to protect right of Frank Dunn, former CEO of Nortel, against self-incrimination.

And what if the OSC is wrong? Apparently being wrong is not a reason for the court to be concerned:

The word "reasonable" is another legal trapdoor. Again under law and precedent, the court would only find the OSC work to be unreasonable were it to appear to have acted in some irrational manner. The OSC, in fact, can be dead wrong in its conclusions, but so long as its conclusions seem "tenable," the court will approve. One Supreme Court judge actually said that even if judges found the final conclusion of a securities regulator to be "not compelling," the judges still should issue a stamp of approval.

Corcoran puts this into perspective:

Or, as the judges in the Sears Holdings case put it, the standard of review allows for "the right to be wrong." Some standard. The presumption of right, therefore, is always with the regulator. Applying such a standard to Maher Arar, a review would have dismissed the compaint against the RCMP on the grounds that the RCMP has the right to be wrong. So go away and stop bothering us with your problems.

The solution to this bizarre situation? Corcoran refers to the Investment Dealers Association report I discussed on October 6. In it, the focus was on putting the courts back in charge of passing judgment:

But maybe the Allen task force will have some impact on this unacceptable structure. In an interview yesterday, Mr. Allen said that while his task force didn't directly address the issue of judicial deference to regulatory power, it is implied in the task force's call for the establishment of a "separate capital markets courts" and "independent tribunals" with expertise to hear securities cases.

With some changes in law, he said, these courts would lift securities law cases out of the hands of judges and courts that today use ignorance as an excuse to rubber stamp extreme and arbitrary securities commission actions that have no place in a rights-driven country like Canada.

Of course, this is the tricky part. Changes in the law is recent years have been in the direction of increasing the OSC's powers and shielding it from judicial oversight. To run counter to that prevailing current will take serious effort. Given that the second most powerful minister in the province, Finance Minister Greg Sorbara, is not allowed to deal with the OSC because of a long-standing conflict of interest, it is unlikely that we'll see that sort of dramatic shift in the near future.